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NZD/USD - Bearish Divergence at Channel Resistance

NZD/USD is testing a key resistance and showing some technical signals that are textbook for selling. Let's examine this trade idea.

NZD/USD Daily Chart

(click to enlarge)

Channel Resistance:- In our previous assessment of NZD/USD, we noted that price was rallying sharply towards a channel resistance.- Since then, price has been cracking this channel resistance, but we can see that it has not clearly broken above it neither.- In fact, at this critical resistance, we are seeing a bearish divergence between price and the RSI.- This bearish divergence could be a sign to sell, unless the overall market is bullish. In this case, the overall market in the past year has been more or less sideways, not bullish. Therefore, this is bearish signal in a scenario where we should heed these signals.Reward to Risk:- Still, trading is a business of not only prediction/projection, but managing risk and reward. Let's take a look at how the potential reward will compare to potential risk.- I think a break above 0.7350 could warrant giving up on selling because it would be a more clear break above the channel.- I am also using the 6/27 session candle as a pivot point, because it had a long tail, which indicates that this was a key selling area. This means, if price can push through this selling area, the bearish scenario would not look so good.- Let's say we have a stop at 0.7380. - Let's say we sell at 0.7270, where price is currently at. - That 110 pips at risk.- In terms of potential reward, let's NOT anticipate a slide all the way down to the channel support. Let's be conservative and look at 0.71 as target. In fact, if price does bounce off of 0.71, I would suspect that the market is ready to break above the channel. So, we would be prepared in case the market is only bearish in the short-term, but turning bullish in the medium-term. - Now, from 0.7270, the 0.71 target is a potential 170 pips. Therefore, the reward to risk is about 1.54:1. This is not a great reward to risk, but it is one that takes the conservative target.- The 0.70 handle for example, could be a secondary target - meaning, if price reaches 0.71, we can close half the position(s), and allow the rest a chance to capture further gains. It might be prudent to also move the stop up so as to lock in profit if price reaches 0.71.- Another way to play with the reward to risk is to wait to sell closer to 0.73. So let's say price starts rallying during the 6/28 session. If it is rising sharply, we might scrap this sell idea. But if the volatility is normal or subdued and price gets to 0.73, the reward to risk improves drastically.

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